Restricted Stock Units (RSUs): How They’re Taxed and What You Need to Know

Restricted Stock Units (RSUs) have become a popular form of equity compensation, especially in the tech and startup world. While they can be a valuable financial benefit, RSUs come with specific tax consequences that every employee should understand. Here's a breakdown of how RSUs are taxed and some strategies to help you plan more effectively.

What Are RSUs?

RSUs are a promise by an employer to give you shares of company stock at a future date—typically after you meet certain conditions such as continuing to work at the company for a set period (the vesting schedule). Unlike stock options, RSUs have value even if the stock price doesn’t increase, because you receive actual shares, not just the option to purchase them.

When Are RSUs Taxed?

RSUs are taxed as ordinary income when they vest, not when they are granted. At the time of vesting, the value of the shares you receive is treated as compensation and included in your W-2 income.

Example

Suppose you are granted 1,000 RSUs. If 250 RSUs vest on January 1 when the stock price is $20 per share, you will have $5,000 of ordinary income that year ($20 x 250 shares).

Tax Withholding on RSUs

Because RSUs are taxed as compensation income, your employer is required to withhold federal and state income taxes, as well as Social Security and Medicare taxes. This typically happens by:

  • Withholding a portion of the vested shares (called “share withholding”), or

  • Selling some shares to cover taxes, or

  • Having you pay cash to cover the taxes (less common).

Often, employers default to the IRS minimum withholding rate of 22% (or 37% for high earners), which might underestimate your actual tax liability—potentially leading to a surprise tax bill and/or underpayment penalties.

What Happens When You Sell RSUs?

Once RSUs vest and the shares are yours, any change in value from the vesting date to the sale date is taxed as a capital gain or loss:

  • Short-term capital gains apply if you sell the shares within one year of vesting.

  • Long-term capital gains apply if you hold the shares for more than one year after vesting.

Example

Let’s say your 250 RSUs vested at $20 per share and you held the shares for 18 months before selling at $30 per share.

  • $5,000 (at vesting) is taxed as ordinary income.

  • The $10 per share increase = $2,500 is taxed as long-term capital gains.

Special Considerations for International Employees

If you lived or worked in multiple countries during the grant-to-vesting period, income sourcing rules can complicate things. Some countries may tax a portion of the income based on where you earned it, even if you no longer live there when RSUs vest. Proper tax planning and treaty analysis are essential in cross-border cases.

For more details on the stock compensation sourcing rules, please visit the Sourcing page of this website.

Planning Tips

  1. Understand your vesting schedule and tax implications for each vesting event.

  2. Set aside extra cash for taxes, especially if your employer withholds at a flat 22%.

  3. Track your cost basis carefully so you can accurately report capital gains when you sell.

  4. Consider working with a CPA—especially if you have international ties, variable income, or large grants.

  5. Coordinate with your broader financial plan, including diversification and risk management.

Key Takeaways

  • RSUs are taxed as ordinary income when they vest.

  • Any gain after vesting is taxed as a capital gain upon sale.

  • Withholding may be insufficient, so plan ahead for taxes.

  • International mobility adds complexity to sourcing and reporting.

  • Proper planning and record-keeping help avoid surprises and optimize outcomes.

Need help navigating RSU taxation or cross-border equity issues? Zeisei Group specializes in complex equity compensation and internationally connected clients. Contact us for personalized guidance.